Well, it started on a good note—the S&P500 edged higher early in the week, but it gave up all its gains—and then some—by the end of the holiday shortened week. Volume was light, again due to the holidays, and volatility, as measured buy the VIX index, crept higher….naturally, as prices retreated.
US economic reports were very weak last week. Almost all disappointed. The Dallas Fed manufacturing survey kicked off the week with an abysmal drop—notching its lowest reading since 2009. The Case Shiller home price index (non-seasonally adjusted) also missed badly. Pending home sales missed. Jobless claims jumped notably. And the big shock of the week was the Chicago PMI which collapsed from 48.7 to 42.9 (it was expected to rise to 50.0). This was its biggest miss ever, and more importantly, when it’s reached these levels in the past, the US has always entered a recession.
So the warning signs that the US economy is finally going into a recessionary phase are growing. Remember, it’s been about 8 years since the last recession began. In other words, based on past historical economic cycles, the US is due–actually overdue–for a cyclical recession.
The technical picture became much more grim last week, primarily because the Santa Claus rally failed. Not only did the S&P500 record one of its weakest Decembers in many years, but the rally couldn’t even succeed in the week between Christmas and New Years Day, a time that almost always shows gains in US equity markets.
For those who’ve been following the year-long topping and distribution pattern in the S&P, this failure should come as no surprise—all year, the S&P has seen professional and institutional owners of stocks sell their shares to mom & pop retail buyers who always—always—are last to join any party in stocks. This shift in marginal buyers from pro to amateur, plus the extremely narrow leadership of a handful of hot mega-stocks (think Amazon), has made the S&P500 appear to be preserving its value.
But beneath the surface, this market has become very dangerous for a long time now. And markets like these, when breadth deteriorates badly, are the very ones prone to crashes and major corrections.
Again, this is no guarantee that a crash or major correction will happen anytime soon. It’s just an observation that almost all US equity markets that have crashed in the past have looked eerily similar to the one that we see today.